- The Washington Times - Wednesday, August 20, 2003

After Leesburg homeowner Eileen Lynch decided to refinance recently, the last thing she expected was a letter from Loudoun County informing her that she was delinquent on her property taxes.

So she called her mortgage company, where she had set up an escrow account. The officials informed her that her loan had been sold.

“I wasn’t surprised; it happens all the time,” says Miss Lynch, who holds a master in business administration from the University of Texas at Austin and had already experienced a couple of loan transfers. “It turned out the other place hadn’t set me up on the system.”

If you are like most homeowners, you can expect that your mortgage will be sold to another lender at least once in the life of your loan. Just don’t count on everything going smoothly. With just a bit of preventive maintenance, you can guard against things such as dunning letters, late payments and bad timing.

Frequent loan transfers are all part of the revolution in the mortgage industry that began in the 1980s, says Jim Maclin, president of Preferred Mortgage Group in Vienna.

“The old image of going down to your local savings and loan with your passbook and the expectation that your loan would sit around earning interest for the next 30 years or so is gone,” he says.

Today, mortgages are expected to earn income a lot faster. So, instead of sitting around earning interest, many loans are sold to secondary buyers on the mortgage market. This frees up money for the original lender, who can then go on to fund more mortgages.

Who’s buying? Today’s lenders package mortgages and sell them to investors. Two federally chartered governmental organizations, Fannie Mae and the Federal Home Mortgage Corp. (Freddie Mac), account for more than 20 percent of total U.S. mortgage funds.

Fannie Mae and Freddie Mac purchase large packages of loans from lenders in order to introduce more cash flow — liquidity — into the market. The result? More lenders, more competition and more competitive interest rates for you.

So what exactly happens when your loan gets sold?

Selling a loan involves selling the servicing rights to that loan. That means that another company will handle billing and collecting monthly payments and the management of other operational procedures associated with your loan. So, instead of paying your loan originator, you will be making your payments to the new lender.

Neither your payment schedule, your location, nor your credit rating had anything to do with your original lender’s decision to get rid of your loan. In fact, some lenders work only as loan originators, meaning that they transfer servicing immediately to another company. But whether your loan is sold immediately, after two years or even after 10, it probably will be packaged with a bunch of other loans.

“Your 30-year fixed may package together with loans from San Francisco and Topeka destined for a firm in Duluth,” says Mr. Maclin, “but it doesn’t really affect the consumer except where you send your payment.”

Of course, things don’t always go as smoothly as designed. During the late 1980s, a number of scam artists profited successfully from the secondary market phenomenon. Unsuspecting homeowners would get a notice in the mail that their loan had been sold, including a post office box address for subsequent payments. In many cases, the loan had not been sold at all, and the payments were going from the post office box directly into someone else’s pockets.

The only things the homeowner got from the deal were a delinquency notice from the legitimate lender and a reduced credit rating.

To address these problems, in 1990 Congress instituted the National Affordable Housing Act, which added certain provisions relating to the secondary mortgage market to the Real Estate Settlement Procedures Act (RESPA). Thanks to this federal mandate, homeowners now have definite rights when it comes to mortgage transfers.

You have the right to know how likely it will be for your lender to sell your loan. This comes in the form of a percentage-based disclosure statement that you should receive from your lender at the time of your face-to-face interview, or no more than three business days upon receipt of your application by mail.

Your lender will disclose how likely he is to sell your loan, based on his history over the last three years. There is no guarantee, however. Just because your lender’s record indicates that he is less likely to sell your loan doesn’t mean that he won’t.

You should expect letters from both your original lender and the new lender containing notice of the sale at least 15 days before your next payment is due. Your old lender should tell you the name of the new lender and provide you with an address, telephone number and the name of a contact person.

Your new lender should also provide you with this information. Both of these letters should be written on company letterhead.

If you should mistakenly send your payment to the old lender, you have a 60-day grace period where you won’t be assessed any late fees.

No lender can change the terms of your loan. The transfer of the loan does not affect any terms other than those specifically applied to the servicing aspects of the loan. On fixed-rate loans, the interest rate and the duration of your loan cannot change even if your loan is sold. If you have an adjustable rate mortgage (ARM), your new lender assumes the original conditions.

You also have the right to lodge a complaint, in writing, should you disagree with some aspect of the loan sale. You should make your complaint by separate correspondence, and your lender must take action or respond within 20 days of receipt. The lender has 60 days to either correct the situation or explain in writing his reasons for not doing so. You do not have the right however, to keep your original lender.

With these rights come certain responsibilities that devolve upon homeowners as the consumers.

“It’s a case of buyer beware,” says Mr. Maclin. “It’s important to keep your head up.”

What exactly does that mean? Know your paperwork, for one thing. Keep copies of everything.

If your mortgage payment is deducted automatically from your paycheck, you will need to cancel your current arrangement and fill out new forms at your bank.

Be aware of where you stand in terms of taxes. Sometimes, both companies — your old and your new lender — will send you IRS Form 1098 listing the interest paid while your mortgage was under their control. Sometimes the new company will send you a form for the entire year. It’s important to find out what your company plans to do, so you will know whether to expect one or two forms.

Double checking helps to ensure that your mortgage transfers go off without a hitch.

“The industry is a little sloppy,” Mr. Maclin says. “Things can fall through the cracks.”

When banks merge or consolidate, there are even more chances for error. So get ready to make some calls.

If you have funds in escrow, it is the responsibility of your old lender to inform the tax authority and insurance company of the change to a new lender. A follow-up call could help to alleviate these kinds of problems. On interest-bearing accounts, all interest should be credited to your account by your old servicer. A follow-up call here could help to ensure that that has been done.

Once the transfer has been made, your new lender will make an analysis of your escrow. He may ask for an increase in monthly payments if the amount you have is not sufficient to cover the items that you have earmarked to be paid through escrow. You should receive an explanation of any changes to your account.

Note that if disability or life insurance was handled through escrow, generally the loan originator is named as the beneficiary. This lender should inform you about the impact the transfer will have on this type of coverage.

If you have flood or hazard insurance handled through escrow, it is the responsibility of your old lender to provide the insurance agent with notice of the transfer. Check to make sure that this has been done.

If you have questions, ask them at the time of transfer. This helps to reduce the kinds of problems that might occur in the future.

If your payment is due before your new coupons arrive, write your loan number on your check and send it to the address provided in your welcome letter.

Luckily, today’s technology can help you check on your mortgage status.

“Technology is very big in the mortgage industry,” Mr. Maclin says.

Large mortgage companies offer online banking and automated telephone service that allow you to check the status of your mortgage any time of the day or night.

“You can confirm your loan transfer, see your escrow analysis, and make sure your premium payments compare to what your lender is saying,” Mr. Maclin says. “You’ll want to compare things and make sure they make sense.”

The bottom line is this: Your loan transfer shouldn’t be a problem if you’ve done your homework.

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